Kindle helps illuminate the skim-pricing strategy in tech

There are two main pricing strategies for consumer products. The first, called skim pricing, consists of pricing a product very high, limiting the market for that product to only those who really, really want it. The other, called penetration pricing, involves setting a low price (frequently below initial variable costs) to quickly grow volume and share and proceed down the experience curve.

For internet products and services, penetration pricing has been the norm. In fact, the most frequently-used pricing for internet products and services has been a particular variant of the penetration-pricing approach: free.

Skim pricing has traditionally been used for luxury goods, like clothes, cars, boats, etc. The high price of these items confers exclusivity and cachet to those who buy them. There was a tradition of skim pricing in earlier-generation tech products (remember $10,000 plasma televisions? Did you buy one? I didn’t think so.) Once the manufacturing costs for those products dropped, so did the pricing.

A related strategy is to foster adoption of new products by subsidizing them through a related service. Mobile phones in the US have been sold this way for a generation.

Amazon has chosen a skim pricing strategy for the Kindle, and it doesn’t appear that they are planning to lower it anytime in the forseeable future. The Kindle 2 costs $349 (no discounts) and the Kindle DX (announced yesterday) is a whopping $499.

Some of the press coverage yesterday focused on the possible payback for the DX through buying lower-priced books. But this isn’t Amazon’s strategy at all. Instead, they are targeting a small segment–heavy readers–who are price insensitive, and who are likely to buy lots of e-books to fill their Kindles. For them, price is no object if they can carry 50 books in their purse. (This excellent post from the New York Times’ Saul Hansell discusses Amazon’s focus on hard-core readers.)

So, Amazon has returned to a tried and true marketing strategy: create a product that serves a need of a small, price-insensitive segment, and price it to capture much of the value created. They are saying this–the Kindle is not for everyone–and profiting by it.

Related:

(Photo: the Kindle DX, available at your local Amazon retailer)

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  • ameyer32

    John,

    I agree with you, Amazon is going for skim pricing, but to me, there is a second phase which will play out in the fall. What if the DX is really aimed at the University Text Book market? Just as MSFT sells an expensive version to the general public and has student discounts at universities, don't you think Amazon will offer the DX to the general public at a premium price to skim the market and with a “student discount” to attract the market, students and text books, that they're really aiming for?

    It is a fascinating strategy playing out before our eyes.

    Andy

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  • Tyna

    I'm usually not a early adopter, but I did spring for a Kindle 2 despite the high “price.” Had I thought about the cost of a new Kindle in this way, I may not have waited so long to jump on board.Something that could change the equation are those who are purchasing a used kindle. I've been surfing through eBay for the past few days and noticed a lot of used k2's for sale, probably due to the DX dropping recently.
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